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ISM/Forrester Report On Technology In Supply Management: Q3 2003
October 2003

By Andrew Bartels, with Ryan Hudson and Tom Pohlmann


Companies are continuing to increase their adoption of online purchasing. Adoption of eProcurement outpaces that of online auctions and use of the Internet in the RFP process, with large non-manufacturers seeing the most bottom-line improvement.

The Institute for Supply Management™ (ISM) and Forrester Research have seen a steady rise in business adoption of online purchase since we began quarterly surveys in 2001 For the Q3 2003 ISM/Forrester study, we asked 294 supply management executives questions about their progress and plans for online purchasing.1 To understand the differences in online behavior across firms we analyzed the results according to manufacturing versus non-manufacturing organizations and companies that procure more than $100 million overall per year versus those that purchase less than $100 million. Overall, we found that:

  • Adoption of online purchasing continues to grow. Eighty-five percent of companies surveyed have made at least some progress toward adopting the Net for purchasing -- and only 4% don't plan to use it at all. Still, the majority are less than halfway along toward their objectives, with only 14% claiming to be mostly or fully adopted. As expected, large companies outpaced lower-volume purchasers with 20% mostly or fully adopted, up 5% from Q2 (see Figure 1-1).

  • More companies are saving as a result of online adoption. The percentage of companies that saved money resulting from their online purchasing climbed from 30% to 35% in Q3. Forty-five percent of large volume purchasers saved, up from 41% in Q2 (see Figure 1-2).

  • Non-manufacturing companies felt the most impact on purchasing processes. Sixty-two percent of non-manufacturing companies made at least minor changes to their procurement processes over the last three months, up from 55% in Q2. These companies were also more likely to make significant or drastic changes -- 18% made big changes in Q3 versus 12% in Q2. Small purchasers maintained the status quo -- only 6% made significant or drastic changes (see Figure 1-3).

  • The Internet's perceived importance remains unchanged. Forty percent of companies told us that the Net will be very important or critical to their purchasing strategies over the next twelve months -- about the same as last quarter (see Figure 1-4).
Analysis Of Specific Purchasing Activities

In Q3, companies again increased their use of the Net for procurement.

  • All firms increased their purchasing of indirect materials. Eighty-nine percent bought at least some indirect materials on the Internet compared with 87.9% last quarter. Slightly fewer purchased direct materials on the Internet (74.1% in Q2 compared with 72% in Q3).

  • On average, online indirect materials purchases grew. The percentage of all indirect materials purchased online grew from an average of 11.0% in Q2 to 12.1% in Q3 after remaining flat last quarter. Non-manufacturers again outpaced overall growth in the average amount of purchases made online -- up two percentage points to 15.5% purchased online, while manufacturers kept purchasing levels flat. Average amount of direct materials purchased online expanded from 11.7% in Q2 to 12.6% in Q3. Manufacturers, while still trailing in adoption, grew average amount of Net purchases for direct materials from 8.8% to 9.9% in Q3. (see Figure 2-1).

  • Only a quarter of companies used online auctions and a third used eMarketplaces. Only 25% of companies participated in an online auction during Q3, but among those, 45% increased their usage over last quarter. Large volume purchasers were four times more likely to use auctions than their smaller counterparts. Similar patterns occurred in the use of online marketplaces. Thirty-three percent of companies purchased through eMarketplaces during Q3 2003 -- down two percentage points from Q2 -- but 42% of them increased their level of activity in Q3 (see Figure 2-2).2

  • Growth in process emphasis outpaces enterprise-wide tool adoption. During Q3, 69% of companies embedded Internet usage in an RFP process, up from 62% in Q2. Forty-six percent of all companies used enterprise-wide procurement tools, up from 42% in Q2. Forty-nine percent of non-manufacturers used procurement tools in Q3, up 11% from Q2. The eBAM index for large-volume purchasers was 1.1 driven by 49% of large companies with enterprisewide procurement tools increasing their usage of these tools from 31.7% in Q2 (see Figure 2-3).
Firms Look For Online Capabilities To Strengthen Supplier Relationships

Companies continued to build links with their suppliers online in Q3.

  • Buyers emphasize more than just transacting online. In Q3, 63% of companies collaborated with suppliers online, up modestly from 61% in Q2. Of those that did, 46% felt that they increased their level of collaboration over the previous quarter. The eBAM index for large companies was 1.5 indicating continued heavy emphasis on using the Net for information exchange and relationship management (see Figure 3-1).

  • Satisfaction with suppliers' online capabilities shows little improvement. The percentage of companies rating online capabilities of preferred suppliers as very bad or poor grew from 27% to 28% in Q3. There was little difference between large and small volume purchasers, with 71% of large companies rating their supplier capabilities as good, very good, or excellent and 72% of small companies doing so (see Figure 3-2).

  • Integration with suppliers was biggest challenge. Comments provided by survey respondents indicated continued concerns about technology integration - both internally between systems and externally with suppliers.
TRENDS AND ANALYSIS

While the Q3 2003 ISM/Forrester data provide evidence that progress is being made in terms of online adoption and usage, those averages disguise a more complex picture in which certain segments of companies vary vastly in results. Large service sector firms are making the most progress and seeing the best results, while other segments -- small manufacturers in particular -- are lagging in online purchasing and tool usage.

Better Savings Opportunities Cause Large Firms To Lead In Adoption

The higher adoption rate of buy-side e-business initiatives among large companies is due to the better cost/benefit equation they face:

  • Size helps contain costs. Larger companies generally have more leverage over supplier terms and conditions. They typically find buy-side software solutions more affordable, as 44% of companies with more than $100 million in spending saw the total cost of ownership (TCO) for buy-side solutions decline over the past three months. In contrast, only 28% of companies with less than $100 million in purchases saw a reduction in TCO. One reason for this may be that larger companies share IT infrastructure and support staff across which costs can be spread.

  • Buying power secures supplier participation. While there's little difference between companies with more than $100 million in purchases and those with less, companies with more than $500 million in purchases have found more success in getting suppliers to participate online -- 80% of such high volume buyers rate the online capabilities of their preferred suppliers as good or better. Eighteen percent rate them as very good or excellent, compared with only 12% of low volume companies.

  • Larger companies have more process focus. Larger companies have demonstrated more progress -- 27% of the companies with more than $500 million in spending reported significant or dramatic changes in their procurement processes, compared with only 6% of smaller companies. One reason is likely that bigger firms often have process improvement functions and metrics at their disposal. On the other hand smaller firms are generally less complex organizations, so it may be easier for them to make process change.
The Non-Manufacturing Sector Has Distinct Online Purchasing Needs

While manufacturing and non-manufacturing firms are generally alike in their use of online auctions and enterprise-wide e-procurement tools, non-manufacturing firms are more advanced in their attitudes toward the Internet in certain areas. Reasons for this include:

  • Service companies lack alternate channels for buying. The service sector does not utilize channels like EDI as extensively as manufacturers -- especially large ones -- do for purchasing. As a result, 47% of non-manufacturers rated the Internet as very important or critical over the next twelve months, compared with one third of manufacturers.

  • Service companies have their own 'direct' purchasing needs. Nineteen percent of non-manufacturers conduct more than 30% of direct materials purchases via the Internet compared with only 10% of manufacturers. This is interesting, as many non-manufacturing organizations do not have what are generally regarded as direct materials. However, many do view other services such as advertising, legal, consulting, and outsourced human resources as direct inputs to their operations -- the sourcing and purchases of which are now better supported by Internet solutions.
Sourcing Will Be The Real Key To Unlocking Value

Tools for automating the purchase process turn out a secondary source of business value compared to the savings from negotiating and gaining employee compliance with strategic sourcing deals. The way companies should improve their spend management differs from the sequence in which they've actually made changes.

  • A focus on procurement automation limits business payback. Firms initially focused on tools for use by the purchasing department, or for use by ERP systems, in buying direct materials. During the Internet boom years, companies then added e-procurement capabilities for purchases by individuals, and experimented with eMarketplaces and private hubs.3 Results were often limited to savings from purely transactional efficiencies, and were difficult to come by with only limited supplier participation.

  • Spend management must begin with a sourcing strategy. Rather than focusing on automating purchase transactions, buyers should start with analysis of spending to identify opportunities for better deals from suppliers and analysis of sourcing events to identify quality suppliers. Finally, they should negotiate and manage contracts that lock in these supplier terms with a smaller, more concentrated network of suppliers.

  • Online sourcing will catch up. The real value of an e-procurement system lies in using enterprise-wide tools to enforce employee compliance with strategic sourcing agreements. Large companies in particular are starting to use e-sourcing tools like online auctions more aggressively to get better contract terms enforceable through existing e-procurement systems. These same sourcing tools can capture supplier invoices, verify that work was performed, pay the supplier, and support the analysis of purchases to help target better sourcing opportunities.

1 The ISM (Institute for Supply Management™)/Forrester Research Report On Technology in Supply Management measures the adoption of Internet-based procurement and tracks online activity for both manufacturing and non-manufacturing organizations. The Report is based on data compiled from a survey sent to supply management executives in more than 600 manufacturing and non-manufacturing organizations belonging to the ISM Business Survey Committees. Membership on these committees is diversified by standard industrial classification (SIC), based on each organization's contribution to gross domestic product (GDP). All geographical areas are represented on the committees. To understand the difference in online behaviors of these organizations, responses were analyzed along three classifications: 1) the results of all organizations; 2) a comparison of manufacturing and non-manufacturing organizations; and 3) a comparison of companies that procure more than $100 million per year and those that procure less than $100 million per year.

2 The adoption rate for new online activities is measured by the eBusiness Adoption Momentum (eBAM) index. The eBAM index ranges from +5.0 to -5.0 and evaluates the number of organizations engaged in online activity, as well as the increasing or decreasing pace of change in their usage. The index points to the following pace of adoption:

3.1 to 5.0 Extremely positive
1.6 to 3.0 Significantly positive
0.6 to 1.5 Moderately positive
-0.5 to 0.5 Negligible
-1.5 to -0.6 Moderately negative
-3.0 to -1.6 Significantly negative
-5.0 to -3.1 Extremely negative

3 That's why department-level e-procurement tools, enterprise-wide e-procurement tools and e-marketplaces have achieved the relatively high level of adoption that they have (i.e., 46% for enterprise-wide e-procurement and 33% for e-marketplaces).



Figure 1-1

How much progress have you made toward fully adopting the Internet in your purchasing activities?

  All respondents Manufacturers Non-manufacturers Buy more than $100 million per year Buy less than $100 million per year
Don't plan to use the Internet 4% 6% 1% 1% 5%
None, but thinking about it 11% 12% 10% 8% 13%
Some progress 59% 63% 55% 53% 62%
About halfway adopted 13% 8% 18% 18% 11%
Mostly adopted 12% 9% 15% 19% 7%
Fully adopted 2% 2% 1% 1% 1%

Figure 1-2

During the past three months, how have your online purchasing activities affected the total cost of ownership of your products or services?

  All respondents Manufacturers Non-manufacturers Buy more than $100 million per year Buy less than $100 million per year
Significant increase 1% 1% 1% 1% 1%
Minor increase 9% 10% 8% 9% 8%
No change 56% 56% 56% 45% 63%
Decreased 29% 30% 27% 37% 23%
Significantly decreased 6% 3% 8% 8% 5%

Figure 1-3

How has the Internet changed your internal procurement procedures?

  All respondents Manufacturers Non-manufacturers Buy more than $100 million per year Buy less than $100 million per year
No change 44% 50% 39% 33% 52%
Minor change 43% 41% 44% 43% 42%
Significant/ dramatic change 13% 8% 18% 24% 6%

Figure 1-4

How important is the use of the Internet in your overall purchasing plans for the next 12 months?

  All respondents Manufacturers Non-manufacturers Buy more than $100 million per year Buy less than $100 million per year
Not important 14% 17% 12% 9% 17%
Somewhat important 46% 51% 42% 37% 53%
Very important 29% 25% 33% 36% 23%
Critical 11% 7% 14% 17% 7%

Figure 2-1

Did you purchase indirect goods/services on the Internet via any means?

  All respondents Manufacturers Non-manufacturers Buy more than $100 million per year Buy less than $100 million per year
Bought some indirect materials on the Internet 89% 89% 89% 94% 87%
Average amount of indirect materials purchased online 12.1% 8.3% 15.5% 14.5% 11.0%

Did you purchase direct goods/services on the Internet via any means?

  All respondents Manufacturers Non-manufacturers Buy more than $100 million per year Buy less than $100 million per year
Bought some direct materials on the Internet 72% 68% 76% 74% 72%
Average amount of direct materials purchased online 12.6% 9.9% 15.0% 16.8% 10.2%

Figure 2-2

Did you purchase goods/services through an Internet auction via any means?

  All respondents Manufacturers Non-manufacturers Buy more than $100 million per year Buy less than $100 million per year
Bought some materials through an online auction 25% 26% 24% 42% 11%
eBAM index 0.4 0.5 0.4 0.7 0.2

Did you purchase goods/services via an online marketplace?

  All respondents Manufacturers Non-manufacturers Buy more than $100 million per year Buy less than $100 million per year
Bought some materials through an online marketplace 33% 32% 33% 44% 26%
eBAM index 0.5 0.5 0.5 0.7 0.3

Figure 2-3

Did you use the Internet as part of an RFP process?

  All respondents Manufacturers Non-manufacturers Buy more than $100 million per year Buy less than $100 million per year
Used the Internet as part of an RFP process 69% 70% 68% 76% 62%
eBAM index 1.0 0.9 1.1 1.4 0.7

Did you use an enterprisewide procurement tool?

  All respondents Manufacturers Non-manufacturers Buy more than $100 million per year Buy less than $100 million per year
Used an enterprisewide procurement tool 47% 43% 49% 64% 35%
eBAM index 0.6 0.6 0.6 1.1 0.2

Figure 3-1

Did you use the Internet to collaborate with suppliers?

  All respondents Manufacturers Non-manufacturers Buy more than $100 million per year Buy less than $100 million per year
Used the Internet to collaborate with suppliers 63% 61% 65% 79% 53%
eBAM index 1.0 1.1 0.9 1.5 0.7

Figure 3-2

How would you rate the online capabilities of your current preferred suppliers?

  All respondents Manufacturers Non-manufacturers Buy more than $100 million per year Buy less than $100 million per year
Very good/ excellent 15% 9% 20% 18% 12%
Good 57% 58% 56% 53% 60%
Very bad/poor 28% 33% 24% 29% 27%

(Base: 294 supply management executives at US companies)
(Percentages may not total 100 because of rounding)


Forrester Research, Inc.
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Tel: +1 617/613-6000
Fax: +1 617/613-5000
www.forrester.com
Institute for Supply Management™
P.O. Box 22160
Tempe, AZ 85285-2160
USA
Tel: +1 480/752-6276
Fax: +1 480/752-7890
www.ism.ws

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